Citigroup [C 20.15 0.74 (+3.81%) ] and Wells Fargo were locked Sunday in a bidding war over a possible emergency takeover of Wachovia [WB 10.00 -3.70 (-27.01%) ], the New York Times said, citing people involved in the talks.

Chuck Burton / AP

The U.S. government, led by the Federal Reserve and the Treasury Department, are also involved in the talks, the newspaper said. The government is resisting guaranteeing some of Wachovia's assets, as it did for Bear Stearns when it engineered that company's sale to JPMorgan Chase [JPM 48.24 4.78 (+11%) ], and is also opposed to taking over Wachovia unless its financial position deteriorates more rapidly.

Citigroup and Wells Fargo are unlikely to bid more than a few dollars for share for Wachovia, whose shares closed Friday at $10, the newspaper said. It is unclear whether Wachovia would be sold as a whole or be broken up, or how much Wachovia bondholders might lose in any transaction, it said.

Investor concern about Wachovia mounted Friday after JPMorgan said it would take a $31 billion write-down on loans it acquired when it took over Washington Mutual's banking unit Thursday.

The write-down raised worry that Wachovia might have to take much larger write-downs on a $122 billion portfolio of option adjustable-rate mortgages it largely inherited when it bought California lender Golden West Financial Corp in 2006.

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Wachovia, based in Charlotte, NC, has $400 billion in deposits and is the nation's sixth-largest U.S. bank by assets, taking into account the conversion of Goldman Sachs [GS 137.99 2.49 (+1.84%) ] and Morgan Stanley [MS 24.75 -2.35 (-8.67%) ] into bank-holding companies this week.